“It is relatively common in ATO audits of SMSFs to find either no lease agreement in place or parties failing to adhere to the terms of an agreement, especially if the arrangement is between related parties,” Grant said.

“SMSF trustees need to ensure they are dealing on arm’s length terms with other parties and provide evidence of this to their auditor.”

Peter Johnson, founder of Advisers Digest, said there is certainly a requirement in superannuation law that an SMSF deals with a related party on terms that are the same as if they are dealing at arm’s-length.

“This is contained in Section 109. Worse, if the fund is not dealing at arm’s-length then any income of the fund would be considered non-arm’s-length income and taxed at 45 per cent,” Johnson said.

“If the fund was under-charging on rent then it would also be providing financial assistance to that related party and that is a breach of Section 65 of the law. It is very important for a fund to be able to demonstrate that it is dealing with any related party tenant of its property that it is dealing on an arm’s-length basis.”

Johnson continued that to comply it is imperative that the fund provides evidence to the auditor that the lease terms are arm’s-length in nature which would usually be by way of an independent valuation of the rent.

“Further, under the in-house asset provisions found in section 71 the law initially states that an asset subject to a lease to a related party is an in-house asset and is limited to five per cent of the total assets of the fund,” he said.

“It would need to be a very big fund to have a property being less than five per cent of the value of all the assets of the fund. The law then goes on to provide an exemption for an asset that is ‘business real property’ that is leased to a related party to be considered as being an in-house asset.”

However, he added, the exemption is for business real property that is “subject to a lease, or to a lease arrangement enforceable by legal proceedings, between a trustee of the fund and a related party”.

“The problem here is the bit that says it is enforceable by legal proceedings. The ATO has interpreted that clause to state that there must be a current lease in place for the property,” he said.

“As an auditor of the fund you need to ensure that the property is not an in-house asset of the fund and that means you need to confirm that there isn’t a current lease in place. Failure to ensure there is a current lease in place is a failure to correctly perform the audit and we are seeing the ATO taking issue with auditors not requiring evidence of a current lease.”

He said it is also very important to check when the lease ends.

“Some leases have a specific term that then moves to a month-by-month ongoing lease. Others have a specific end date. If there is a specific end date you need to execute a new lease on market terms,” he said.